Fuzzy Picture for NBC's Newest Cable Property

Though USA Network boasts a few hits, the channel is losing viewers and faces a backlash over its steep distribution fees

When Comcast Corp. contemplated making a bid for Vivendi Universal's entertainment assets this summer, it wasn't exactly enamored of one of the properties on the block: USA Network.

Despite such hits as the quirky detective series "Monk," USA lacks the devoted following that translates into cable success, Comcast executives contended during the negotiations. One of them dryly noted that the company could drop USA and suffer less viewer backlash than if it yanked the Weather Channel from its lineup.

Comcast ultimately backed away from making an offer to Vivendi. But as the country's largest cable operator, it still is certain to play a big role in USA's future.

Along with the rest of Vivendi's U.S. entertainment operations, USA ultimately was snapped up by General Electric Co.'s NBC in a deal worth an estimated $14 billion -- one-third of which is attributed to the worth of the cable channel. Now, though, NBC must grapple with USA's stagnant ratings and its steep subscription fees, which promise to make it a target for cable and satellite distributors determined to cut their costs. Chief among the companies gunning for USA: Comcast.

USA is especially vulnerable now. Contracts with cable and satellite TV distributors that deliver USA to an estimated 80% of the channel's subscribers have lapsed or are coming up for renewal in the next three years, according to industry sources. Comcast's agreement with USA expires in two years.

USA is "charging 'must-have' prices, but it's not a 'must-have' network," one cable source said.

Neither Comcast nor NBC would comment about the potential showdown over USA.

Network insiders, however, say they aren't worried. NBC Chief Executive Bob Wright, who is slated to run the new NBC Universal, "is great at figuring out ways to keep rates from going down," one TV executive said.

Still, the threat to USA underscores the fragile economics of cable channels, which are growing ever more anxious as half their revenue base -- subscription fees -- comes under attack by distributors.

Foremost in the distributors' sights are Walt Disney Co.'s ESPN and News Corp.'s regional sports networks, because they charge the highest subscription fees in the industry.

But distributors are scrutinizing all channels. They are raising particularly tough questions about the relevance of broad-based "general entertainment networks" such as USA in a 500-channel universe overflowing with specialty outlets and on- demand services.

"We are not just talking about sports," said Fred Dressler, programming chief at Time Warner Cable, the country's second-largest cable operator. "All networks that don't have good ratings or strong brand loyalty are going to have problems with operators that are trying to get their costs under control."

Already, Comcast has exercised its clout as the cable provider to 1 in 4 pay TV households, cutting its programming costs this year by $270 million, largely by slashing subscription fees. It is aiming for additional 5% annual reductions over the next several years.

"It's a tough environment," acknowledged David Zaslav, president of NBC Cable Networks.

"For this to work, we have to make each channel more important, give each a clear identity. People still watch only 14 or 15 channels -- and those are the ones we want to be."

Cable channels long have been seen as the last growth engine of the entertainment business. That's one reason NBC was so eager to gain control of not only Universal's USA Network but also its Sci Fi Channel, Trio and its 50% stake in the Sundance Channel. The Universal deal promises to triple the revenue that NBC generates from its cable portfolio, which already includes CNBC, MSNBC and Bravo, as well as stakes in several other channels such as A&E.

But increasingly, the financial health of cable programmers is looking shaky.

Fragmented Audience

Although some channels such as Viacom Inc.'s MTV are going strong, others have been showing signs of weakness as the number of networks has proliferated. With viewers enjoying so many options these days -- from Animal Planet to the Zhong Tian Channel -- solid ratings have become tougher to achieve and advertising dollars more difficult to draw in.

At the same time, cable channels have seen the once-spectacular growth in their subscription revenues slow as pay TV has saturated the marketplace; more than 80% of all U.S. households now have pay TV.

Faced with these trends, cable channels can ill afford to lower the fees that they charge distributors -- though that's just the prospect they are up against.

One showdown occurred with Disney, which purchased the ABC Family Channel in 2001 and counted on steep subscription hikes to cover the $5.3-billion cost. Most operators have refused to give in to Disney's demands, citing the channel's lackluster ratings.

"USA could be the next Family Channel," an executive at one major distributor said.